Addressing the challenge of problematic debt: Australia and Eurozone

A TFI research project by Daniel Richards, Abdullahi Ahmed, and Muhammad Tahir
Posted on October 01, 2019

“Addressing the challenge of problematic debt: Australia and Eurozone” is one of the short-term research projects supported by the Think Forward Initiative.

Debt can become problematic when it gets out of control. Some households suffer more than others when dealing with problematic debt, up to the point that it could lead to psychological stress and deterioration of their overall well-being. Daniel Richards, Abdullahi Ahmed, and Muhammad Tahir from RMIT University investigated how financial literacy, financial capability and financial wellbeing relate to households’ problematic debt-taking in Australia and 8 European countries. They also analysed how cultural differences in Australian and European households determine the intensity to which problematic debt is experienced.

Want to know more about this study? Download the full report below!


Being in debt does not necessarily mean trouble. Some households successfully use debt for long-term purposes, purchasing large assets and investments. Other households use debt to successfully fund non-essential purchases and maintain lifestyle. However, debt does need to be repaid; if you borrow beyond your means and cannot meet repayments, debt will eventually cause you a lot of distress.

Prior research illustrates the relationship between unmanaged problematic debt and mental health issues (Turunen & Hiilamo, 2014), including migraine headaches (Jarl, Cantor-Graae, Chak, Sunbaunat, & Larsson, 2015), depression (McLaughlin et al., 2011) and attempted suicide (Jacoby, 2002; Meltzer et al., 2010). There is an urgent need to understand the factors related to problematic debt; an endeavour we address in this very project. We are specifically interested in the type of debt that will cause most households real discomfort.

Prior research focuses on macro-economic reasons to explain certain trends of increasing household debt in some economies. Think of an unequal distribution of wealth (Barba & Pivetti, 2009), a constant decline in the national income (Meniago, Mukuddem-Petersen, Petersen, & Mongale, 2013), and an increase in housing prices coupled with lax lending attitudes of financial institutions (Kim, Lee, Son, & Son, 2014).

“Since 2010, many countries in the Euro-zone have seen a reduction in household debt but Australia has seen an increase (Trading Economics, 2018).”

Why households run up debts

There is little research that focuses on the individual-level factors leading households towards problematic debt, even though it’s often individuals who decide to take on debt. This study addresses this shortage of research by considering the differences between people who relate to why they do (or do not) have problematic debt. These individual factors are:

  • Financial literacy- knowledge of financial concepts (Grinstein-Weiss, Spader, Yeo, Key, & Freeze, 2012)
  • Financial capability- the ability to conduct financial tasks (Kagotho, Ssewamala, Patak-Pietrafesa, & Byansi, 2018)
  • Financial wellbeing- the perception of one’s current and future financial situation (Vlaev & Elliott, 2014)

In addition, we consider various cultural factors, researching how these relate to problematic debt in households. The amount of debt people take on depends on their whereabouts. Since 2010, many countries in the Eurozone have seen a reduction in household debt but Australia has seen an increase (Trading Economics, 2018). We want to find out how cultural values relate to household use of problematic debt using Hofstede’s six cultural value dimensions (Hofstede Insights, 2019).

One of Hofstede’s dimensions is indulgence, of particular interest to our research because it relates to the tendency to be impulsive and give in to desires. We predict indulgence will increase the use of problematic debt as people use debt to fund impulsive behaviour. Another dimension is long-term orientation, where high long-term orientation reflects use innovation to adjust for the future. We predict that high long-term orientation will decrease the use of problematic debt as people will plan financially for the future.

The research

For quantitative analysis, we used two datasets: the ING International Survey (IIS Think Economic and Financial Analysis, 2017) and the Household, Income, and Labor Dynamics Australia (HILDA) survey (Summerfield et al., 2017). Each of these datasets have 7,000 responses, with the IIS dataset offering cross country comparisons, and the HILDA Survey containing in-depth financial literacy, financial capability and financial well-being information. The mathematical analysis involves ordinary least squares regression and logistic regression. More details of this are available in the report.

Finding 1: There are five types of debt that are problematic.

Previous research found that non-collateralised debt (not backed by assets) is more problematic than collateralised debt (backed by assets) (Dunn & Mirzaie, 2012). Our analysis of the IIS dataset identified five types of non-collateralised debt that people have discomfort with. These are overdrafts, personal loans from a financial institution, credit cards, loans from friends or family, or loan from a vender. In addition, 40% of individuals have these types of debts on average, illustrating the prevalence of problematic debt in many countries.

Figure 1 below outlines the percentage of respondents with problematic debt in each country, highlighting that Australia, Australia and Spain have the highest percentages of problematic debt. The Netherlands has the lowest.

In the HILDA data, we got access to information regarding credit card debt use. We defined respondents to have problematic debt when they did not pay off their credit card balance each month. Overall, 1 in 4 of Australians with credit card debt were not paying off the balance monthly.

Finding 2: Financial literacy, capability and well-being with problematic debt

We investigated if there is a relationship between the three concepts: financial literacy, financial capability and financial well-being. There is a clear link between financial capability with financial well-being and financial literacy. However, when you consider other factors like age, the relationship between financial literacy and financial well-being is not statistically valid. This suggests that being knowledgeable about financial terms does not mean you will have positive perceptions of your financial situation. Financial capability seems to be the crucial aspect here: financial literacy can increase your financial capability, affecting your financial well-being.

Logistic regression of the HILDA survey found that high financial literacy, financial capability and financial well-being are all associated with less problematic debt. That is, if a household is more financially literate, more financially capable and/or has a positive perception of their financial well-being, then they are less likely to be in problematic debt. Of these variables, financial literacy has the smallest influence, with financial capability and financial well-being being more influential.

Importantly, the findings were replicated in the IIS dataset, showing the variables hold across countries. Overall, it seems the behaviour and perception are key factors linked with household problematic debt.

Finding 3: Cultural variables

Why do citizens of some countries have more problematic debt than others? Perhaps it’s all about culture, or at least partly. We incorporated Hofstede’s cultural value dimensions to investigate how these influence financial decision-making processes. Our results show that indulgence is positively associated with problematic debt. This finding proposes that problematic debt is being used to fund impulsiveness and a tendency to give in to desires.

The influence of long-term orientation on reduced problematic debt was not robust, so whilst there were indications that those with a long-term focus have less problematic debt, we could not convincingly support this finding. Our result is contrary to other research which has found long-term orientation is a determinant factor in household debt management (Breuer, Hens, Salzmann, & Wang, 2015).

Finally, we found that increased masculinity is associated with more problematic debt. A high score for masculinity reflects a society which prioritises competition, achievement and success. Perhaps this masculinity dimension reflects societies with less infrastructure to provide financial support, leading to more problematic debt use.

“Curricula that focus on financial behaviours and attitudes towards personal finance will be more influential at reducing problematic debt.”


Our research highlights the presence of problematic debt and the five types of such debt. Three types are provided by financial institutions, indicating that regulation should be focused on them. Another implication concerns financial education provided by governments, which typically focuses on knowledge acquisition. We suggest that education of this nature will have some, but limited impact. Curricula that focus on financial behaviours and attitudes towards personal finance will be more influential at reducing problematic debt.

Finally, our research shows that indulgence is positively related to problematic debt. Impulsive buying, a concept related to indulgence, leads to worse financial outcomes for households (Fenton-O'Creevy, Dibb, & Furnham, 2018). Before granting loans that may lead to problematic debt, financial institutions might want to consider whether applicants are predisposed to impulsive behaviour.


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